If you own a business that operates out of your home, you may be able to deduct a wide variety of expenses. These deductions could include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance and even cleaning costs. This can be a tricky area of the tax code, so make sure you have professional guidance.
Here are some of the top mistakes people make when taking home office deductions:
1. Not Taking the Deduction
The most common mistake for home office users is simply not taking the deduction! Taking the deduction seems too complicated for some, while others believe taking it increases your chances of being audited. The rules can be complex, but a home office structured correctly would allow for the home office deduction. There is even a simplified method that can be used to compute the deduction. Contact Cray Kaiser for any questions you may have.
2. The Space Isn’t Exclusive or Regular
The IRS mandates that the space you use must be exclusive and regular for your business. In a nutshell, here’s what that means:
Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids or a place to store your hockey gear. Any kind of non-business use can invalidate the deduction.
Regularly: Your home office needs to be the primary place you conduct your regular business activities. That doesn’t mean that you must use it every day or that you can’t ever work outside the office. However, it should be the primary place for activities such as recordkeeping, billing, making appointments, ordering equipment or storing supplies.
3. Mixing Up Your Other Work
If you work for someone else in addition to running your own business, you need to be extra careful. IRS rules state that you can use a home office deduction as an employee only if you work remotely for your employer.
Unfortunately, this means if you run a side business out of your home, you can’t bring work home from your employer’s office and do it in your home office. Doing so would invalidate your use of the home office deduction.
4. The Recapture Problem
If you own your home and have been using your home office deduction, you could be in for a future tax surprise. If you sell your house, you will need to account for the depreciation of your home office. This rule, called the Depreciation Recapture Rule, often creates a tax liability for many unsuspecting home office users.
5. Not Getting Help
There are special rules that apply to your use of the home office deduction. If any of the below statements are true for you, contact us for support with navigating the deduction.
- You are an employee of someone else.
- You are running a daycare or assisted living facility out of your home.
- You have a business renting out your primary residence or a vacation home.
While there are benefits of utilizing the home office deduction, there are many details that are important not to overlook. If you have questions about your home office and the deductions available to you, please contact us today.